Motivations for Bank Mergers and Acquisitions: Enhancing the Deposit Insurance Put Option versus Earnings Diversification

Abstract

The article presents an empirical evaluation of two contrasting hypotheses regarding motivations behind bank mergers, particularly in consideration of the gaining of deposit insurance put option value. Commercial banking conditions in the United States since the 1980s are reviewed, citing the increased occurrences of bank acquisitions and merging. The shareholder wealth maximization principle is explored as an underlying force of two theories explaining the motivations: seeking bank growth in order to procure greater deposit insurance coverage from the Federal Deposit Insurance Corporation (FDIC) or for earnings diversification.